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What is a Security Token Offering (STO)?

What is a Security Token Offering (STO)?

Read this article to find out what Security Token Offerings (STOs) are and how they're different from Initial Coin Offerings (ICOs).

6th September 2019

The cryptocurrency industry is becoming more common amongst business transactions. With the growing presence of token offerings; it is important to understand the consequences it entails, its difference to an initial coin offering, and its status in Australia. In this article, we’ll discuss what security tokens are and how they work in the business market.

Security Tokens

Securities are tradable financial assets that holds some sort of monetary value. Common examples of securities are stocks, bonds, debentures, and options.

Security tokens depict your ownership interest, recorded on blockchain. a A security token’s value is derived from the underlying financial securities that are attached towards it.

Utility Tokens

A utility token represents your future interest in a company’s product or service. Utility tokens are usually distributed through an Initial Coin Offering (ICO). As the coin holder, you are given rights on a network such as the rights to pay for a certain service.

Security Token Offering (STO)

An STO issues security tokens. They are subject to tighter regulatory measures as it is an investment asset. Below is an outline of its advantages and disadvantages.

Advantages

Lower risk

Security tokens have lower risk because of its regulatory rules. As a result, there is more transparency and accountability. Tighter regulatory measures also ensures consistency and better protection to the consumers. Also, they are backed by real world assets which allows them to be priced relative to the value of the underlying assets.

Blockchain reputation

Cryptocurrencies are mostly unregulated and highly speculative. This leads people to have bad perception towards it. However, security token offering’s are beneficial for blockchain’s reputation as they are legally compliant, leading to lower risks. In a sense, it brings an element of credibility towards the blockchain industry.

Liquidity

While traditional stock markets operate strictly between 10 am – 4 pm, security tokens can be traded around the clock. The ability to trade 24/7 leads to higher liquidity. This is because anyone can access the internet at virtually any time.

Disadvantages

Still in its early stages

It is still an emerging market. STO’s were first completed less than 2 years ago. Because of this, there is not much precedents nor do we have the benefit of time. We don’t know whether, in the long term, security token offering’s are effective or not.

Heavier weight on consumers

Although the exclusion of middlemen such as financial institutions or lawyers may reduce costs, this will shift the responsibility on the consumers. As a buyer, you will need to research more on the processes and products/services.

Status in Australia

The Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth) governs any business activity that involves crypto assets. Australian laws apply where an STO takes place. For instance, this creates an obligation for the issuer to prepare a prospectus. To learn more about the relevant rules that apply, you can visit ASIC online.

Conclusion

A security token is a tokenised form of real world assets. Subsequently, an STO is when an issuer issues the security token. This is contrasted with an initial coin offering as an ICO issues a utility token. Consequently, to avoid encountering such challenges and to minimise your own risk, you should contact a business lawyer.

Don’t know where to start? Contact us on 1800 529 728 to learn more about customising legal documents and obtaining a fixed-fee quote from Australia’s largest lawyer marketplace.

Author
Ryan Tjahjono

Ryan currently works in the content team as a Legal Intern for Lawpath. He is in his third year of a Bachelor of Law and Business degree at UTS.